Bank of Canada 'Open' to Inflation-Targeting Changes, Official Says

OTTAWA – Bank of Canada's second-highest ranking official, Carolyn Wilkins, said she is "completely open" to exploring alternatives to the central bank's inflation-targeting regime, including whether there should be less of an emphasis on hitting 2%.

The comments emerged at the end of an all-day conference the Bank of Canada organized to discuss the central bank's inflation-targeting regime, and possible changes and improvements that can be made when the program comes up for renewal in 2021.

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"The question would be what kind of research could we do to move the discussion forward, because obviously if we thought any change was a good idea, we would have done it," she told reporters after the event at the central bank's headquarters.

For over a quarter-century, the Bank of Canada's inflation-targeting regime has focused on hitting the midpoint between 1% and 3%. It was renewed for another five-year term last year.

But the Bank of Canada conference comes as central banks are grappling with tepid price pressures, and fueling a fresh set of criticisms and questions about inflation targeting. Factors such as aging demographics, low growth and higher savings rates are working to keep the real neutral interest rate -- or the inflation-adjusted rate that keeps the economy in balance -- at a relatively low level. As a result, central banks run the risk of taking rates to zero or below when efforts to lift growth amid a downturn.

She said the central bank's current inflation-targeting setup provides it some flexibility to move slowly if necessary to hit 2%, especially when it comes to preserving financial stability. "The important question to pursue is, what are the cost and benefits of making greater use of this kind of flexibility, especially when it comes to anchoring expectations," she told conference participants in closing remarks. "Similarly, what are the costs of benefits of...putting less emphasis on the midpoint of the 1% to 3% target range."

Through the day, some conference participants said it was time to target price stability and stop eyeing a 2% level. Some said the bar remained high for any change. Some warned Canada couldn't unilaterally change its regime without coordinating with the U.S., otherwise it ran the risk of fueling higher, volatile inflation.

In comments to reporters, Ms. Wilkins said rate policy is made with an eye toward what is set to unfold down the road. It is in that context that the Bank of Canada decided to raise its benchmark rate twice in recent weeks, on stellar growth indicators, even though headline inflation is well below target, at 1.2% as of July.

"Inflation targeting is a forward-looking business," she said. "If you choose your policy rate based on where inflation is based today, you will make a mistake."